Land Tax Can’t be passed on to tenants

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Creative Commons License photo credit: Roger Lynn

The Age today ramps up the property lobby’s annual war against contributing to society in Land tax hike to hit tenants

Knight Frank managing director Paul Burns said landlords had been complaining about their 2009 land tax bills, and agreed that tenants on net leases would be the first to cop the extra charges. But he said competition for tenants would eventually see landlords absorb the cost.

“New tenants come in and look at net rent, plus outgoings. Ultimately, it will pass on to the property owner.

Why shouldn’t landlords contribute something to government for the massive capital gains they have received over the last few years?

We agree that there should be yearly land valuations to avoid these biennial spats by the property lobby. It’s also fairer and can’t be too difficult in an era of modern software such as google earth.

We support a higher flatter, land tax. This will fund the removal of payroll and stamp duty taxes. This is part of the move towards supporting the productive economy and deterring speculation. Higher land taxes should be encouraged to remove the incentive for land speculation, the pressure that has pushed us all into so much debt and delivered the GFC. Without speculation, housing will become a human right again. At present it is a speculative right.

However, the line that land tax will be passed on is contentious. Land taxes set at a decent rate can not be passed on. Why? Because land is in fixed supply, higher land taxes encourage property owners to use land more efficiently. Thus the junk room gets cleaned up and rented out, the huge backyard that is rarely used gets sold off or turned into something economic such as a small veggie garden. At present we have rafts of speculative vacancies hidden from the market.

Some believe that a Land Tax can be passed on. But this is only because it is so low. The higher the Land Tax, the less that can be passed on. As the property market reaches efficiency (ie all zoned land is used to it’s best use), fewer properties are withheld from the market. With more options to rent from, this puts downward pressure on rents. Thus the landlord has to pay his fair share for the capital gains accruing to his land.

We don’t see landlords complaining that they can now borrow more money from the bank to buy more land when their property is more valuable.

The current rise in ‘For Lease’ and ‘For Sale’ signage around the city hints that as the downturn in the market accelerates, those speculators withholding supply from the market in lieu of manufacturing capital gains are now trying to cash out. Without a Land Tax these properties would sit idle until the next property bubble takes off.

Thus society has some recourse with a land tax system at present. However, if the property lobby had their way and this ‘unfair’ tax was removed or further watered down, many of them would contribute nothing to society in tax and recessions would last longer. This is because land cannot be hidden in tax havens like so much of the tax system allows.

Over the next few months we will hear more calls to remove this tax. It is part of the usual lobbying efforts of the vested interests in the run up to the Victorian State Government budget. Read Gavin Putland’s excellent piece on holding charges and the media game.

13 Comments

  1. Steven Shaw02-04-2009

    Why is land different. If I own a tractor, I don’t pay the government rent for it. That would be … strange. If I own a plot of land, neither do I want to pay the government tax for owning that land. After all, I’d already have paid for it.

    Paying council tax/rates for services such as water and garbage collection is a different matter I suppose. Ridiculous that such charges should be based on land value though.

  2. Steven Spadijer04-04-2009

    Steven
    First, that presupposes that a feudalist parchment of paper automatically make you entitled to a piece of land. According to classical liberalism, you only OWN the land if you USE the land. As soon as you stop using it, someone else, namely a free market player, should use it. LVT is the most efficient way to ensure you use, rather than abuse the land for short term capital gain. So that is why land is different: it is a necessary imput – after all, you apply your tractor OVER land. A business also needs a premise. To apply labor and capital, you need something to stand over.

    Second,your objection can be easily remedied – if you have a problem with paying the land tax annually, then simply introduce a 100% tax at the point of sale of the land *only*. This discourages speculation by recycling the value the community created. After all, every service such as “water or garbage” collection is deposited in higher land values(as opposed to the property ON the land). The former is based not on your work or effort, but those of all of us “aggregate government expenditure equals aggregate rents”. This is why a piece of land in central CBD, serviced with greats views and transport in Sydney is more expensive than the desert which has no such infrastructure. You own everything you create (i.e. labor and capital) and anything which is created by us all by our mere presence (infrastructure like roads, community centres etc) is recycled to fund further government services. That value of that of the owner and the community can be easily separated: we do it all the time with insurance forms – the land value is isolated from the property value if an arsonist or burgular were to devalue your property.

  3. Steven Shaw19-05-2009

    Hi Karl, I’m renting at the moment. I’m trying to work out how the Land Tax can’t be passed on to me if we introduce it. Forget for a moment that I have a lease for another 9 months. Let’s say the 9 months are up. I pay $20k per year. I reckon the house is worth $450k in the current market. Let’s say the unimproved land value is (conservatively I think) $200k and at 10% LVT that would be $20k/per charged to my landlord. At the moment the landlord is likely using the $20k of rent to pay the interest on the loan (perhaps only partially). Now he has an additional cost of $20k/year. Other landlords have a similar problem. What stops the rent doubling?

  4. Steven Shaw28-05-2009

    Steven Spadijer, apologies for the delayed reply. I am not sure what you are referring to when you say “that presupposes a feudalist parchment”. I am certainly not advocating feudalism!

  5. Steven Spadijer28-05-2009

    Hello Steven,

    Steven here (I’ll also try and answer the questions you posed to Karl as well).

    “I’m trying to work out how the Land Tax can’t be passed on to me if we introduce it”.

    Because, Steven, the landlord is *already* charging you the maximum market price (for rent) – squeezing you for everything you got. So the burden falls entirely onto the landlord (unless the tax is ever so small that it can be passed on). If your land tax bill is $20000, then how can this be added onto your rent, given the maximum rent is 450 000 (or whatever per year) – there would be no tennants who could afford it – they cannot evict you, but MUST still pay the tax – evicting you would reduce there income stream further! Albeit, rather amusingly, some landlords have forced tennants – who are multimillion dollar companies – to sign contacts where they are responsible for the land tax bill, although that can easily be overcome by a simple act of Parliament).

    Martin Fieldstein showed LVT can only be passed onto people in the short run, not the long run (I’ll try and hunt down the paper). Because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants.

    Also, in commercial land competition makes it impossible for a business producing goods on a valuable site to charge more per item than one producing similar goods on less valuable land – after all, producers and traders at different locations are paying different rents to landlords now, yet like goods generally sell for much the same price and employers pay their workers comparable wages. The tax cannot be passed on to a tenant who is already paying the full market rent.

    Furthermore, nothing except LVT stops the rent going up: LVT, essentially means it becomes pointless to hoard land – it means rents are socialised, while wages and profits privatised. It also means more accomodation can be built to house people (land becomes cheaper as a cost of production) and more idle land / sites would come onto the market (note, currently, there are 10 million vacant homes in Australia – surely, a large number of this is speculation e.g. the 1000 vacant sites, as found by Earthshare).

    As for the feualism bit, I was pointing out to your automatic acceptance of the status quo: the government has screwed things up, by allowing some people to control the land over others – how can a free market be free if people CANNOT access the land / sites to enter the market in the first place; if 10% of people own 60% of all the land in Australia, say. LVT means those who have the idea, talent and genius will ought to have the capacity to use it over specualtors. That is, if you are willing to pay a single tax on land, it means you need that land badly and want to use it for a productive purpose.

    Currently, however, anarchocapitalists et al. tell us government is bad, yet if government is so bad, why is the status quo great? (ie government created property rights to few over many, how is this liberating or not merely advancing the inequalities government itself has created?) They accept the very order of things government has created! Even if you have to pay for your own private defence of the land, this does not stop land values – due to population growth, technology increases etc – from falling – any increase in land values outweighs any cost you may pay for having a private police force to defend it.

    You also right:
    “Paying council tax/rates for services such as water and garbage collection is a different matter I suppose. Ridiculous that such charges should be based on land value though…”

    Not really, because the land value shows the quality of the area, where that parcel of land is situated. Land value is an efficient what of “gauging” the value of the community itself – hence why places with good services, great views, good roads, hospitals and schools are worth more than a desert out in the middle of no where. You may not need to have a tax per se (although a tax on land would mean better services and would fund the police force to reinforce your property right), but one can levy a 100% tax (as a single tax) at the point of sale. So if you sell your house at say $100 000 and the land is 30 000 of that market value that is how much you pay, full stop (at the *point* of sale / transaction). The idea is also that you pay the tax to exclude others from being on your land.

  6. Steven Shaw29-05-2009

    Because, Steven, the landlord is *already* charging you the maximum market price (for rent) – squeezing you for everything you got.

    I don’t buy this argument. By introducing the LVT you are changing the game. The market will adjust. You abolish all income tax, excise, GST, CGT etc and introduce the LVT. Frankly this will mean that I’m more able to pay. Since my income tax will be removed and I’ll certainly make savings on fuel and food.

    If your land tax bill is $20000, then how can this be added onto your rent, given the maximum rent is 450 000 (or whatever per year)

    You lost me there. How is maximum rent $450,000?
    The current market rent is about $400/wk for this place – about $20,000 a year.

    there would be no tennants who could afford it – they cannot evict you, but MUST still pay the tax – evicting you would reduce there income stream further!

    This does kinda come across like a cry of “down down down with the landlords!!!” :)

    It turns out that a more apt estimate of the land value here is $250,000 with the building worth currently $200,000. That would make the LVT $25,000/year. What with our rent here paying $20,000 to the landlord he is already in a losing position before he’s even paid a cent of mortgage interest! (I know, I know, with NG sometimes this mortgage interest expense is clawed back from the taxpayer…). The landlord must sell, does he not? There will be a glut. House prices will plummet, will they not?

    Now, I believe house prices will plummet anyhow but with your LVT, they are sure to!

    Have you wondered how this fall in house prices (and land prices) will affect the “land bounty” i.e. the government revenue via LVT? Say house prices drop 50%, won’t government revenue also drop 50%? I guess the government would have to increase the LVT to 20% of the unimproved value.

    Martin Fieldstein showed LVT can only be passed onto people in the short run, not the long run (I’ll try and hunt down the paper). Because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants.

    Would be interested to here the arguments from the paper. My thinking is that if the tenant is capable of paying more then the market rent will rise.

    Furthermore, nothing except LVT stops the rent going up: LVT, essentially means it becomes pointless to hoard land – it means rents are socialised, while wages and profits privatised. It also means more accomodation can be built to house people (land becomes cheaper as a cost of production) and more idle land / sites would come onto the market (note, currently, there are 10 million vacant homes in Australia – surely, a large number of this is speculation e.g. the 1000 vacant sites, as found by Earthshare).

    Where do you get the figure that there are 10 million vacant home in Australia? I’d love to find out more about that. I reckon heaps of home have been vacant because they are being renovated because prices are going up so fast. I know a few site around Wynnum here that don’t have “for sale” signs out the front. Can’t say for sure why though.

    I don’t deny that the system is broken. It is certainly weighed in favour of those with wealth already because they have the means to borrow and spectulate in a rapidly rising market. Some of them will be toast in the coming collapse (in the property market). Some have already gone under due to the share market collapse. Some of those who exit the market in a timely manner will greatly increase their wealth while others suffer during the recession. However, I’m not inclined to believe that speculation is inherently evil.

    As for the feualism bit, I was pointing out to your automatic acceptance of the status quo: the government has screwed things up, by allowing some people to control the land over others – how can a free market be free if people CANNOT access the land / sites to enter the market in the first place; if 10% of people own 60% of all the land in Australia, say. LVT means those who have the idea, talent and genius will ought to have the capacity to use it over specualtors. That is, if you are willing to pay a single tax on land, it means you need that land badly and want to use it for a productive purpose.

    No, I’m not accepting the status quo. Far from it, I’m questioning the status quo. The system is so badly broken that no previously assumed fact should be left unscrutinised!

    The main concern affecting me directly is the inability to find a house at a reasonable price. I don’t have much of an idea about it except living in it, perhaps studying in it and working from home in it ;).

    I’ve only recently sort out thought on the subject. I’m currently reading Murray Rothbard’s Ethics of Liberty. I imagine you’d find it quite interesting – particularly chapters 6-11. I just finished those. He reject feudalism there and goes further than I would in putting right past wrongs (I would trade off the costs of court-time against liberty).

    Currently, however, anarchocapitalists et al. tell us government is bad, yet if government is so bad, why is the status quo great? (ie government created property rights to few over many, how is this liberating or not merely advancing the inequalities government itself has created?) They accept the very order of things government has created!

    I’m enamoured with the idea of a free society as espoused by anarchocapitalists like Rothbard. I prefer the name voluntarism but think of it as pretty much equivalent at my current level of understanding. Yes, Government is bad. The status quo is bad. You will certainly find the Ethics of Liberty quite interesting. I assume that you accept private property rights?

    Even if you have to pay for your own private defence of the land, this does not stop land values – due to population growth, technology increases etc – from falling – any increase in land values outweighs any cost you may pay for having a private police force to defend it.

    Does not stop land values from falling? I thought that the georgist argument was that “progress” (roads, libraries, population growth etc) _increase_ the value of land?

    You also right:
    “Paying council tax/rates for services such as water and garbage collection is a different matter I suppose. Ridiculous that such charges should be based on land value though…”

    Not really, because the land value shows the quality of the area, where that parcel of land is situated. Land value is an efficient what of “gauging” the value of the community itself – hence why places with good services, great views, good roads, hospitals and schools are worth more than a desert out in the middle of no where.

    I don’t see how garbage collection should cost more in an area with good views as opposed to one without. Perhaps it would – let the market decide :)

    You may not need to have a tax per se (although a tax on land would mean better services and would fund the police force to reinforce your property right), but one can levy a 100% tax (as a single tax) at the point of sale. So if you sell your house at say $100 000 and the land is 30 000 of that market value that is how much you pay, full stop (at the *point* of sale / transaction). The idea is also that you pay the tax to exclude others from being on your land.

    I don’t see how it helps to have either a 10% LVT on the ULV or a one-off 100% LVT at sale time. What’s more, it’s like paying 10 years of LVT in advance. Assuming that ULVs are going up some with the means might just pay in advance. Then you open yourself up to the argument that you are supporting special interests (i.e. the wealthy).

  7. Steven Spadijer29-05-2009

    The main issue here is whether LVT can be passed onto tennants – I do not mean to dodge the issue – but let us rearrange the burden of proof – show me how a landlord can pass on a 100% LVT single tax? What is your rationale that the tax can be passed on?

  8. Steven Spadijer29-05-2009

    I wrote to you Steven, asking you to explain to me why you think what you think (that is, to explain to me why you think a land tax an be passed onto tennants).

    I have sent you another email, which reads:

    “I think that while thinking why the landlord can (supposedly) pass on a tax, you will realise that the landlord cannot pass on the tax.

    Perhaps, this rather ironic, newspaper extract may help you understand why. The opening paragraph starts by reading:

    TENANTS could be forced out of their offices as landlords pass on the cost of a massive rise in land tax.

    Uh, excuse me, but you can’t “pass on” a tax bill to a tenant whom you’ve just evicted for incapacity to pay. As Gavin Putland explains:

    “…tenants who are forced out can no longer pay rent and therefore can no longer help their landlords bear the tax. Remember, however, landlords MUST pay the tax regardless of whether they have tenants, they must seek and retain tenants in order to cover the tax. [The fact the landlord is already charging the highest market price and needs the rental inflow to cover the tax], means this necessity tends not to increase rents, but to reduce them. Therein lies the real reason why landlords hate land tax. So they campaign against the tax — by pretending that its effect is the opposite of what it really is…If the evicted tenants are replaced by other tenants who can pay more, this is possible only because market rents have risen. If land tax were reduced or abolished, market rents would rise more because landlords would have less need to attract and retain tenants, diminishing supply”.

    ps Also, assuming that tennants are slugged with a land tax bill (which we observed they can’t), they can always look elsewhere (but remember if a tennant leaves the landlord still needs to pay the tax – irrespective of whether he finds more tennants or not!); moreover, obviously a working individual on an average income cannot afford to pay for the tax – as they are already being milked by the landlord for every penny they have – therefore the tax cannot be passed onto the tennant, depsite the fact the landlord *must* pay the tax, as noted above.

    And if a landlord forces a corporation to sign a contact to pay the tax (which they *may* afford) then, that, as I pointed out earlier, can be easily remedied through legislation: the burden to pay falls entirely owner of the land.

    Although most *small businesses*, there is no shifting the burden. Because… again…

    TENANTS could be forced out of their offices as landlords pass on the cost of a massive rise in land tax.

    Uh, excuse me, but you can’t “pass on” a tax bill to a tenant whom you’ve just evicted for incapacity to pay (the tax).

  9. Steven Shaw29-05-2009

    Steve, I already said why I think the landlord can pass on the tax. I said:

    You abolish all income tax, excise, GST, CGT etc and introduce the LVT. Frankly this will mean that I’m more able to pay. Since my income tax will be removed and I’ll certainly make savings on fuel and food.

  10. Steven Shaw29-05-2009

    In your second post you say

    as they are already being milked by the landlord for every penny they have

    but you neglect to mention that when the LVT tax is introduced, all other taxes are abolished. This means that the tenants are not longer “milked for all they have”. They have much more capacity to pay increased rents. The landlord must either increase the rent or sell the property. Those are the only two options.

  11. Steven Spadijer29-05-2009

    Let’s use your logic. We agree that selling the property becomes more likely under a LVT scheme (which means land values slump as more land comes onto the market). But the reason than why he cannot increase rents is exactly that:

    A. More people will sell their properties (relinquishing idle land, especially those who only own land for speculative gains) so less people will need to rent as land values fall – recall there are 10 million vacant homes in Australia and that Earthshare found roughly 1000 vacant properties in just *one* suburb of Melbourne (I doubt many people have a holiday house there, anyways!): http://www.debtdeflation.com/blogs/2009/04/06/steve-keens-debtwatch-no-33-april-2009-lies-damned-lies-and-housing-statistics/

    So as the tax goes up, land comes onto the market…less demand for rent – there is no capitalization incentive in the land market – any capital gain (due to poulation growth or increased demand) goes into the public perse;

    B. A tennant will always look for a cheaper option, inducing competition into the market place (rents to expensive, eh, just move – but the land is immobile – the landlord *still* has to pay the tax even when he is searching for tennants);

    C. Furthermore, even if a landlord finds someone who is willing to pay more, to what extent do you think that can go up to? You reckon a tennant will take on a $20 000 single tax land bill? I doubt it! The landlord is already squeezing you for everything you can afford, even if you abolish all taxes. I explained how shifting the burden via LVT can be avoided by simple legislation. Hence, it can only be passed over in the short run (that is, by increasing the rent, by, say $10 over a period of a few months). But if you have a 100% tax, that means there is no point of being a landlord because all the rent you do collect simply goes to the state. The burden falls upon you to hand it over. That is, socialised rents, privatised wages and profits. As I said, if the legislation clearly states that it falls upon the *owner* of the property to pay, then it is there responsibility. They cannot pass it over, or eventually must sell the property (back to point 1).

    http://www.smh.com.au/national/suburbs-hit-with-land-tax-increase-20090524-bjj0.html

    “The amount of unpaid land tax peaked in February 2007, when the Office of State Revenue was chasing more than $303 million in unpaid bills…”

    Gosh, I wonder why: because income poor, asset rich landlords cannot pass over the tax…

  12. Kurt16-12-2011

    You own your tractor, because you have payed the producer for it, or the first owner have.
    But to whom have the first owner of your plot of land payed?

  13. Justin Keith03-03-2014

    Steven, technically you HAVE saved money on the purchase price of the land if it’s in a taxing jurisdiction – it’s baked into the purchase price of the land. If there were no property taxes, the purchase price of the land would be higher.

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